I. A call option has an exercise price of $30 and can be used to buy one share of common stock that currently sells for $35. Based on this information, which of the following statements is correct? a....

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I. A call option has an exercise price of $30 and can be used to buy one share of common stock that currently sells for $35. Based on this information, which of the following statements is correct? a. The theoretical or fundamental value of the option is $25. b. The option probably sells for a price greater than $5. c. As the market price of the common stock falls, the value of the option will increase, since the potential rate of return will increase. d. The option probably sells for less than $5.
2. The price of Z Corp stock is currently $24 per share, but in 6 months you expect it to rise to $32. Z Corp does not pay a dividend. You buy a six-month call on Z Corp with a strike price of $25 and a current market price of $3. What holding period return do you expect on this call?
a. 133% b. 167% c. 175% d. 200%
3. Which of the following are accurate in relation to the writer of a naked call? I. Losses are limited to the strike price minus the option premium II. Losses are virtually unlimited III. Profits are virtually unlimited IV. Profits are limited to the option premium received
a. I and III only b. I and IV only c. II and III only d. II and IV only
4. When speculating with call options on stocks, the option which offers the greatest rate of return potential is a. an out-of-the-money option. b. an in-the-money option. c. an option which has a striking price that is less than the market price of the underlying stock. d. option that trades at a price equal to or greater than the market price of the underlying stock.

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Answered Same DayDec 23, 2021

Answer To: I. A call option has an exercise price of $30 and can be used to buy one share of common stock that...

David answered on Dec 23 2021

122 Votes

Answer 9 A put option is a right to sell a share at a particular price thus selling price of the option
purchaser is fixed, thus now he will be willing that the price of the share should go down so that he is
able to purchase it at very low price and gain the difference.
Say Put option is purchased at $100, it means the option purchaser will sell at $ 100, Now there can be 2
cases:
Price falls: Say $ 90, then he will be at a profit of $10 (purchase at 90 and sell at 100)
Price rises: say $150, then if he purchases at 150 and sells at 100 then loss will be 50. Thus he will not
exercise the option.
Hence he will be loosing the advantage of price increase. (Part a)
Answer 10 Calculation of profit to the investor:
Please note that here there is no use of tax rates because investor has held share for 10 months and
tax ios levied only id security is held for > 1 year.
Selling price= $ 16
Less: Purchase price = $ 14
Profit = $ 2
Dividend income after tax = $1
Total income = $1+$2= $3
Holding period return = $ 3/$14 = 21.4% (Part c)
Answer 11 Part a is not always correct but not always ie municipal bonds not always carry lowest
interest rates.
Part b is wrong ie bonds which are freely callable provide low return as they are...

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I. A call option has an exercise price of $30 and can be used to buy one share of common stock that currently sells for $35. Based on this information, which of the following statements is correct? a....

Answer To: I. A call option has an exercise price of $30 and can be used to buy one share of common stock that...

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